Goodbye prudence as Mr Brown starts meddling

Gordon Browns proposals for helping first-time buyers and key workers to enter the housing market may well prove to be the policy that undoes the Chancellors reputation for competence and prudence. While the proposal to free more land for development is to be welcomed  although it does not go far enough  other measures announced yesterday are unlikely to achieve their stated objectives and may seriously undermine economic stability.

The shared ownership scheme announced by the Chancellor to help first time buyers is an extension of a scheme already in place in some parts of the country to help key workers. It is in effect a housing subsidy paid for by £1bn of taxpayers money, albeit a subsidy arrived at by a rather convoluted process. Like all subsidies, it is not guaranteed to achieve its stated aim: it may simply raise prices by the same amount as it subsidises home-purchasing, thus having no effect on those it is trying to help while making houses less affordable for those outside the scheme.

The long-standing provision of housing subsidies for key workers raises the question of just who is a key worker? Today, being a key worker often seems synonymous with being a public sector employee, but the impact of the blockades of fuel depots a few years ago demonstrated how dependent we all are on those private sector employees who transport fuel around the country, to give just one example. Why should a social worker be considered a key worker eligible for financial assistance but not the supermarket manager upon whom we rely to supply our food?

If only a small number of people take advantage of the extended shared ownership scheme its impact will be minimal but it will help few people; if a large number of people are allowed to go down this route, however, then the economic consequences could be severe. Under the proposals the government will fund 25% of the price of a home in return for a nominal rent after five years and the capital appreciation of its share.

The danger here is that a large amount of public money and hence government future spending plans may become tied to the value of this equity; the governments financial position may become dependent on house prices remaining at a high level. If it is true  as many analysts believe  that we are presently near the end of a housing bubble, which may be expanded by a rise in house purchases and prices under Browns scheme, then we may reach a situation where the government will not be able to allow the bubble to burst. The governments economic policy may become geared towards supporting an unsustainable housing market for fear of the cost to the public purse of a collapse in house prices. If and when such a bubble did finally burst the consequences would make the post-1992 recession seem like a walk in the park.

If Browns proposals wont work, then what will? High house prices are caused by a mismatch between supply and demand; too many people wanting to buy too few houses leads to rising prices. The solution is to look again at planning regulations so that more houses can be built to meet this demand. The Chancellors proposals to free government-owned land for house building are a step in the right direction, but they will not come close to equalising supply and demand. Problems in the housing market will never be resolved until the supply of houses is allowed to reflect demand.

Some public sector employees may struggle to get on the housing ladder because they are paid less than they would be in the private sector. The solution to the specific problems such people face is to introduce market forces into the public sector so that these workers are paid an appropriate rate for their work. Browns proposals do not address the underlying problem of relatively low pay in the public sector, but instead aim to distort the housing market as a means of correcting the distortions caused by non-market wages.

When markets are prevented from functioning in this way the long-term consequence is that more and more markets cease to work properly and the economy becomes bogged down in more and more interventions designed to correct more and more market failures that have in fact been caused by previous interventions. Economic intervention is like a drug: once the government becomes hooked it is very hard to give up and the initial positive effects soon give way to deepening misery. Over the last eight years the Chancellor has earned a reputation for sound economic management, but it seems he is no longer able to resist the temptations of interventionism.

For recent IEA publications on land use planning seeLiberating the Land[4] by Mark Pennington andThe Land Use Planning System[5] by John Corkindale. In September 2005 we will be publishing a book on the economics of the countryside and government policy. In December 2005, the IEAs journal, Economic Affairs, will be comparing systems of urban planning used around the world.